Wacky healthcare prices in America.

In a well-functioning market, the Law of One Price should hold true.  The law says that the price of a barrel of oil should be approximately the same all around the world plus some adjustment for transportation costs which are generally very small for oil, at least within a few hundred miles of an ocean or a pipeline.  The law holds for most markets, but not for healthcare.  Within California alone, the price of a basic X-ray varies by over 1000% as this chart from Health Affairs displays.

hospital prices And it isn’t just X-rays. All hospital prices vary tremendously from hospital to hospital even within the same city. USA Today: 

It isn’t just $5-a-pill aspirin. Daily room charges exceed $5,000 in some New Jersey hospitals. An appendectomy in California, including about two days in the hospital, has an average list charge of $18,000. Nationally, federal data show the median charge for treating a heart attack is more than $20,000. … In California, if you get your brakes fixed on a car, the mechanic has to give you an estimate before doing the work. That’s not true if you go in for major surgery.” 

Patients in other states say they want such information.
When Karen Hamers’ teenage daughter Michele needed knee surgery, Hamers called several hospitals near her home in Vero Beach, Fla., and asked how much the surgery would cost. At the time, her family did not have health insurance. After choosing a hospital, Hamers paid the surgeon and then also paid the hospital what it said the surgery would cost: $4,200.
“Six days after surgery, we receive a letter from the hospital asking for an additional $21,000,” Hamers says. She asked for an explanation and got an itemized bill.
“It was two pages of gobbledygook,” Hamers says. “We could not understand it. They could not explain it. We showed it to our doctor, and he didn’t understand it.”
Hamers had kept a detailed log of her daughter’s 20 hours in the hospital, including a list of all the staff who cared for her and what drugs she was given. After reviewing the log and its own records, the hospital reduced its additional billing to $610.
…Hospital charges are similar to the list price on a car. Few pay the full amount because insurers negotiate discounts, and Medicare tells hospitals what it will pay. Still, some insurers do pay full charges, such as when a policyholder goes to an out-of-network hospital with whom the insurer does not have a negotiated discount. …Charges have gone up quickly in recent years and often bear little relationship to the actual cost of services. “It’s not unusual for a hospital’s billed charges in a market to increase 25% to 30% in one year,” says John Bauerlein, senior partner Milliman USA, a firm that tracks health care spending. …[In 2003 Glenn Melnick] says, the national average [hospital] charge was 211% higher than cost. In some states, those ratios are even higher. California, Florida and Nevada have some of the highest hospital charges, close to 300% higher than costs, according to his research.
Whereas hospitals universally charge vastly inflated sticker prices the average profit margin at the nation’s corporate hospitals is low.  They averaged only 4.3% on the latest 2015 information.  That is because few patients actually pay the full price.  Most insurance companies negotiate a lower price and many people who lack insurance simply don’t pay because they run out of money. Furthermore, although Professor Melnick said that hospital prices are more than double the ‘actual’ costs, he seems to be equating ‘actual costs’ and ‘marginal costs’.  He is not including fixed costs like administrative costs and the uncompensated care for under-insured hospital patients.  These costs have to be paid by someone.  Hospitals have to charge an inflated fictional list price that very few patients actually pay because it allows them to price discriminate to recoup their fixed costs.
It is hard to get accurate pricing and cost statistics from hospitals, so there are varying estimates of how much hospitals mark up their sticker price. For example, Uwe Reinhardt estimated that hospital prices are even more inflated than Professor Melnick.  Reinhardt estimated that in 2004: “U.S. hospitals were actually paid only about 38 percent of their “charges” by patients or their insurers.”  That means that the hospitals billed charges that are over two-and-a-half times greater than what they actually got paid.
Andrew Kurz investigated the prices that hospitals billed Medicare in 2011 and found that hospitals billed Medicaid widely different prices in different states.  Medicare only paid New Jersey hospitals 16% of the prices that they billed for whereas Medicare paid Maryland hospitals 94% of what they billed.  Medicare doesn’t care what hospitals bill, and uses its own methods for deciding what to pay but that doesn’t mean that Medicare pays everyone the same price either.  Kurz found that whereas the average hospital bill per patient was $9,754, California hospitals got paid almost $3,000 more than average whereas Alabama hospitals got paid over $2,000 less than average.
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